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Best cybersecurity stocks to invest in

Stocks

Written by:

Zhi Rong Tan

A slew of high profile security breaches in the past 2 years have shifted the spotlight on cybersecurity as businesses and governments move their services and operations online. Cybersecurity stocks are expected to gain from this digital revolution.

Here, we’ll explore the cybersecurity sector and share our pick of the best cybersecurity stocks today.

Why should investors keep an eye on Cybersecurity Stocks?

The COVID-19 pandemic presented new challenges to businesses. As firms move to work from home in the midst of the pandemic, the rush to cloud everything has created numerous security gaps that malicious actors had been able to exploit. There have been numerous high-profile security breaches, including that of the networking software business SolarWinds and Microsoft, which confirmed being infiltrated by the Lapsus$ hacking organisation. While Microsoft has stated that no customer data has been compromised, the episode demonstrated that no one is immune. Even big tech companies with in-house security teams couldn’t dodge it.

While more employees are returning to their workplaces, the shift to the cloud will be permanent. Companies are unlikely to revert to their previous practices. This means that cybersecurity would be much more crucial in this new digital era.

According to the Allianz Risk Barometer, cyber incidents are the leading concern for businesses worldwide in 2022. Cyber incidents, such as ransomware attacks, data breaches, or severe IT outages, concern businesses even more than business and supply chain disruption, natural disasters, or the COVID-19 pandemic, all of which have had a significant impact on businesses in the past year.

In fact, cybercrime has surpassed business interruption (BI) as the most dreaded consequence, despite BI ranking top eight times in the Allianz Risk Barometer’s 11-year history. This demonstrates the growing concerns about cyber threats, which firms are finally paying attention to.

Source: Allianz.com

According to Statista, global cybersecurity spending is predicted to reach $150 billion in 2021, with the global cybersecurity market size expected to climb to $345.4 billion by 2026, at a 9.7 % CAGR.

Source: Statista

Given that cybersecurity is a hot sector, many cybersecurity stocks are expected to gain from the digital revolution. But before we jump into the Best Cybersecurity Stocks, we should first grasp what this sector entails.

Introduction to the Cybersecurity industry

There is no one-size-fits-all solution in this space. Different businesses have different demands and requirements, which necessitates the use of different cybersecurity solutions such as:

  • Network security,
  • data security,
  • endpoint security,
  • identity access management,
  • application security,
  • cloud security, and
  • IoT security.

All of them are used to safeguard sensitive information and critical systems in various ways, and organisations will have to choose which suite of products works best for them.

According to a poll of 850 CEOs, the most common use of AI in cybersecurity is network security, followed by data security and endpoint security. Given that the network is the backbone of every IT system, it is not surprising that businesses are attempting to safeguard it. Data, in second place, is a valuable commodity valued by hackers and, as such, deserves security just like any other asset. Finally, endpoint security in third place suggests the proliferation of endpoint devices, which is likely to grow as we become more digitised.

Source: Capgemini.com

You may be wondering what network security and endpoint security are. Before we go any further, let’s establish the various types of security. This is crucial because, as you will see later, different cybersecurity companies have different focuses. Please keep in mind that despite my attempts to separate them for simplicity, many of these solutions are interconnected.

Network Security

A network joins two or more devices to exchange data through an internet connection. As such, network security is the act of protecting your data from unauthorised access through computer networks. Network security encompasses both software and hardware solutions and protects you from a wide range of attacks. It serves as a barrier between your network and malicious activity.

Application Security

Any software used to run a company may have vulnerabilities that allow hackers to expose and enter your network. Application security addresses these flaws and prevents a breach from occurring. Authorisation, authentication, encryption, and testing are some of the characteristics of application security.

Endpoint security

Endpoint security is the cybersecurity approach to safeguarding endpoints such as PCs, laptops, and mobile devices from malicious activities with the intent of stealing data or otherwise causing damage to systems, persons, or organisations. Anything that connects to the business network from outside its firewall is termed an endpoint. Such security is crucial since any endpoint could be exploited as a point of entry for malicious actors, and that the number of devices is only growing as a consequence of the pandemic-related shift to remote work.

Endpoint security is comparable to an upgraded version of antivirus that users install on their devices inside or outside of the firewall. While traditional antivirus works in the background, checking a device’s content for patterns that match a database of viral signatures, endpoint security employs advanced methods and procedures such as threat hunting and endpoint detection and response.

Information security

The process of building and implementing solutions to protect your vital company information against deletion, interruption, and manipulation is known as information security. It is an essential component of cybersecurity where it is specifically designed for data security and identity access security.

The main goal of InfoSec is to ensure the confidentiality, integrity, and availability (CIA) of a company’s data. It is designed to ensure that only authorised people, applications, or systems have access to certain information. Confidentiality means that no unauthorised person has access to sensitive information. Integrity guarantees that the information is not altered by chance or compromised. The third factor, availability, guarantees that information is readily accessible on a continuous basis for day-to-day activities.

Cloud Security

Digital information and services are often stored on servers spread across data centres globally and accessible over Internet networks. Cloud security guarantees that the infrastructure and data held in cloud systems are secured from cyber attacks. Other goals include ensuring privacy and serviceability within a network of shared cloud infrastructure resources.

IoT Security

The internet of things is abbreviated as IoT. IoT connects billions of devices to the internet in order for them to exchange data with one another; these devices are integrated with sensors and other software and have made our lives a lot simpler.

IoT security is the act of securing IoT devices from vulnerabilities, and with IoT growing at a rapid pace, IoT security is becoming more important.

In general, these solutions include the use of artificial intelligence, which seeks to achieve at least one of these things: Detection, Prediction, and Respond. Respond detection entails the AI detecting abnormalities, whereas prediction involves the AI combing through a vast quantity of data to make predictions and take preventative steps to avert any assault. Finally, AI is also utilised to respond to cyber attacks by developing a virtual patch for an identified vulnerability. Nonetheless, it is still in its early stages and is not widely used at the present.

Now that we have an understanding of the cybersecurity sector, let’s look at some cloud security companies that stand to benefit from this trend.

Best Cybersecurity Stocks

Cybersecurity StockMarket Cap ($B)Price to Sales RatioCybersecurity Product Category
CrowdStrike Holdings (NASDAQ:CRWD)$54.2836.8Endpoint Detection & Response
SentinelOne (NYSE:S)$1039.38Endpoint Detection & Response
Zscaler (NASDAQ:ZS)$32.5737.2Zero Trust, Cloud Security
Cloudflare (NYSE:NET)36.954.23Zero Trust, Cloud Security
Okta (NASDAQ:OKTA)$22.5016.33Zero Trust, Identity and Access Management, Network Security
Palo Alto Networks (NYSE:PANW)$61.7012.58Next-generation firewall, Cloud Security, Endpoint Protection, IoT Security, Network Security, Zero Trust

1) CrowdStrike Holdings (NASDAQ: CRWD)

  • Market Cap: $54.28 billion
  • Price to Sales Ratio: 36.8
  • Cybersecurity product categories: Endpoint Detection & Response

CrowdStrike, the largest cybersecurity business and the market leader in endpoint security software, was established in 2011 to reinvent security for the cloud era. With its Falcon platform, the company created the first multi-tenant, cloud-native security solution capable of safeguarding workflows on a variety of endpoints such as laptops, desktops, and servers.

With the growing demand for cybersecurity solutions, Crowdstrike’s revenue increased 66% year on year from $874.4 million in FY2021 to $1.45 billion in FY2022.

Similarly, the gross margin has grown over time and is now around 79%.

Nonetheless, the company is still losing money, with a net loss of $234.8 million in FY2021, compared to $92.6 million the previous year. This is very common in such a fast-growing industry, and it is something you will see throughout the stocks mentioned here.

Moving forward, CrowdStrike offers the following guidance for the first quarter of fiscal 2023 (ending April 30, 2022) and fiscal year 2023. (ending January 31, 2023).

Assuming FY2023 revenue comes in at its lower guidance of $2.13 billion, we will be seeing a 47% annual growth. Although lower than in FY2022, this is still a significant figure.

2) SentinelOne (NYSE: S)

  • Market Cap: $10 billion
  • Price to Sales Ratio: 39.38
  • Cybersecurity product categories: Endpoint Detection & Response

SentinelOne, another pure-play cybersecurity company established in 2013. The company recently went public in June 2021 at a valuation of $10 billion, making it one of the biggest IPOs for a cybersecurity company. As part of its cybersecurity offering, the firm also includes endpoint detection and response, making it a direct competitor to CrowdStrike.

While CrowdStrike has a larger market capitalisation (5 times that of SentinelOne), SentinelOne is expanding at a faster rate.

In FY2022, the company’s revenue increased by 120% to $205 million, up from $93 million in FY2021. This growing revenue is accompanied by an increasing gross margin. Nonetheless, at 63%, its non-GAAP margin is lower than CrowdStrike, demonstrating that this firm lacks the economies of scale that CrowdStrike possesses.

On the bright side, SentinelOne announced the acquisition of Attivo, a company that specialises in identity security and lateral movement protection, in FY2022. With this,  SentinelOne now extends its AI-powered prevention, detection, and response capabilities to identity-based attacks, setting the benchmark for XDR and speeding business zero trust adoption.

This firm is also set to grow. With revenue projection for FY2023 (ending January 31, 2023) coming in at $366-370 million, indicating a year-over-year increase of 79-81%

Sidenote: Its projection excludes the proposed purchase of Attivo, which is slated to be finalised in the company’s forthcoming second quarter.

3) Zscaler (NASDAQ: ZS)

  • Market Cap: $32.57 billion
  • Price to Sales Ratio: 37.2
  • Cybersecurity product categories: Zero Trust, Cloud Security

Zscaler, which was founded in 2007, is a cloud native security company that works in conjunction with endpoint security services to help keep data secure. Zscaler, in particular, offers cloud security services to enterprises, which replace traditional incoming and outgoing gateways.

Using a security framework, Zero trust, it helps secure business infrastructure and data by requiring all users, whether inside or outside the organisation’s network, to be authenticated, authorised, and continuously validated before being granted or retaining access to applications and data.

The graphic above depicts the distinction between standard Firewalls/VPNs and Zero Trust. While firewalls/VPN are a security checkpoint at the HQ’s entry, guests would be free to roam the building (network) unaccompanied. Zero Trust access, on the other hand, entails guests being escorted throughout the premises (network).

Zscaler seems to be a decent choice since, rather than competing with Crowdstrike, their products complement one another. In the most recent quarter, the company’s sales were $255.6 million, up 63% year over year. Looking back at the FY2021 results, the company grew by 56%, putting it in the high growth company category.

Its profit margin is also not bad, coming in at 81%. This margin, however, appears unlikely to increase significantly in the future, having remained nearly unchanged over the past four years. Zscaler would therefore need to expand its customer base or product offering in order to increase revenue.

Moving forward, the company anticipates FY2022 revenue of $1.045 billion to $1.05 billion or a 55% increase year on year.

4) Cloudflare (NYSE: NET)

  • Market Cap: $36.9 billion
  • Price to Sales Ratio: 54.23
  • Cybersecurity product categories: Zero Trust, Cloud Security

Cloudflare, a competitor of Zscaler, also offers a Zero Trust network that automatically connects users to corporate resources, with identity-based security no matter where they are.

Like Zscaler (which has a comparable market capitalisation), Cloudflare has seen double-digit revenue growth (rather similar growth rate). In FY2021, their total revenue was $656.4 million, marking a 52% increase year on year.

Its gross margin, which is 79%, is likewise extremely close to Zscaler’s.

Cloudflare expects overall revenue of $927 to $931 million in FY2022, representing a 41% year on year growth. Nonetheless, its growth rate is lower than Zscaler’s.

5) Okta (NASDAQ: OKTA)

  • Market Cap: $22.5 billion
  • Price to Sales Ratio: 16.33
  • Cybersecurity product categories: Zero Trust, Identity and Access Management, Network Security

Okta, a leading identity and access management service, also uses the zero-trust architecture in its identity management, requiring user authentication before granting access to data and apps. Its Okta Identity Cloud helps organisations to securely link the right people to the right information at the right time. This is especially crucial in an increasingly mobile and cloud-based world, where businesses have a complex network of stakeholders, including employees, third-party contractors, suppliers, and consumers, all of whom require varying levels of access.

Okta revenue has been rising continuously over the year as it continues to expand its operations, with total revenue for FY2022 coming in at $1.30 billion, a 56% increase year on year. Unfortunately, it is still losing money, with both the operational and net losses increasing.

While gross margin remains at a record of 77%, it is also starting to trend downward, which may not be a good sign if it continues.

Looking ahead, Okta’s revenue is estimated to be $1.78 to $1.79 billion in FY2023, reflecting a % to 38 % year on year growth. This would indicate a slowdown in the company’s growth, which might explain why it is one of the cheapest cybersecurity stocks highlighted here.

6) Palo Alto Networks (NYSE: PANW)

  • Market Cap: $61.7 billion
  • Price to Sales Ratio: 12.58
  • Cybersecurity product categories: Next-generation firewall, Cloud Security, Endpoint Protection, IoT Security, Network Security, Zero Trust

Palo Alto Networks, the cheapest cybersecurity stock among those discussed here, is the largest cybersecurity business in terms of total annual sales. This company dates from a time before cloud computing, and is one with expertise in firewalls, a mechanism that secures traffic entering and exiting a physical location.

While its legacy services continue to be in high demand, the real growth is in the cloud. As a result, the firm has acquired more than a dozen smaller cloud-native businesses during the last two years, all of which have been financed by its already lucrative platform.

Total revenue growth for the company is hovering around 25% to 30%. Given its current market share, expanding at a rate of 25 to 30% is quite impressive. Having said that, it is still one of the ‘slower’ growers compared to the others.

In terms of gross margin, it is now approximately 74%, which is in line with many others.

Moving forward, we can expect total revenue to expand by 27% to 29%, assuming the current pace of growth, resulting in total revenue of $5.4 billion.

Are you looking to add Cybersecurity Stocks to your portfolio?

There you have it, some of the leading cybersecurity businesses to consider.

Overall, this industry is projected to grow further as a result of the world’s digitalisation. One thing to keep in mind is that most, if not all, of the companies listed here are still operating at a loss. Many of these firms are still losing money as they try to grow their offerings and market share. Aside from that, several of them are still trading at high valuations, albeit having cooled significantly from their highs last year.

As a result, if you are interested in any of these stocks, you should carry out more research on their market position, unique selling point, liquidity, and other factors.

If you want to learn more about the cybersecurity space, you should look at this research, which provides a more in-depth look at the AI-enabled cybersecurity space – “Reinventing Cybersecurity with Artificial Intelligence”. Apart from that, here is a website where you may learn about even more cybersecurity businesses. It also includes a brief overview of the firm and its product offerings.

Alternatively, if you’re looking to grow your portfolio using cybersecurity stocks, you can join Cheng at his next live webinar to learn how you should approach cybersecurity stocks (and tech stocks) as a growth investor.

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